Giantec Semiconductor Corporation (SHSE:688123) shares have had a terrible month, losing 25% after a relatively good period beforehand. Instead of being rewarded, shareholders who have held for the past twelve months are now sitting on a 10% loss.

Although the price has dropped significantly, Giantec Semiconductor’s price-to-earnings (P/E) ratio of 59.7 may still be sending very bearish signals at the moment, as almost half of all companies in China have a P/E below 27, and even P/E below 16 is not uncommon. However, the P/E could be quite high for a reason, and further research is needed to determine if it is justified.

Giantec Semiconductor has not performed well recently, as its declining earnings compare poorly to other companies that have on average seen some growth. It could be that many are expecting the dismal earnings performance to rebound significantly, which has prevented the P/E ratio from collapsing. One would really hope so, otherwise one is paying quite a high price for no particular reason.

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Is the growth appropriate for the high P/E ratio?

A P/E ratio as high as Giantec Semiconductor’s would only be truly comfortable if the company’s growth is on track to significantly outpace the market.

Looking back, last year saw a frustrating 60% drop in profits for the company. As a result, profits from three years ago are also down 20% overall. So we have to admit that the company hasn’t done a particularly good job of growing its profits during that time.

Looking ahead, estimates from the only analyst covering the company suggest earnings will grow 66% per year over the next three years, well above the 24% per year growth forecast for the overall market.

With this information, we can see why Giantec Semiconductor is trading at such a high P/E compared to the market. It seems that most investors are expecting this strong future growth and are willing to pay more for the stock.

The last word

A significant drop in share price has barely reduced Giantec Semiconductor’s very high P/E ratio. We usually warn against reading too much into the price-earnings ratio when making investment decisions, although it can say a lot about what other market participants think of the company.

We found that Giantec Semiconductor maintains its high P/E ratio because its forecast growth is expected to be higher than the wider market. Currently, shareholders are happy with the P/E ratio because they are fairly confident that future earnings are not at risk. Under these circumstances, it is difficult to imagine the share price falling much in the near future.

There are also other important risk factors to consider before investing and we have found 1 warning sign for Giantec Semiconductor that you should know.

If this Risks make you reconsider your opinion of Giantec Semiconductorexplore our interactive list of high-quality stocks to get a sense of what else is out there.

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